1. How does acquisition finance work?

In general, acquisition finance can be separated into (a) a financing structured based on the solvency of the buyer (corporate structure) and(b) a financing solution based on the solvency of the target (leveraged structure).

Especially debt financed acquisitions yield both a high risk and a high upside potential. The low equity needs allow for the take-over of a significantly bigger company to grow exponentially. On the other hand, a series of parameters need to be managed carefully to have a longterm success with the acquisition.

Elements of structured acquisition finance are:

• Equity capital
• Mezzanine capital
• Vendor oans
• Senior and junior loans
• Earn-outs
• Internal means of finance within the target

2. What should you consider?

Practical rules for veraged finance are:

• The equity share in the acquisition vehicle (NewCo) should be minimum 30 % of the purchase price, for smaller transactions min. 40-45 %
• The maximum debt capacity of corporations by rule of thumb should be no more than 3-times EBIT 
• The debt capacity can be enlarged, the higher and more stable the acquired EBIT is
• Costs for mezzanine capital are significantly higher than senior/junior loans. Therefore, a mezzanine tranche of 1-1,5-times EBIT should not be exceeded.
• Free Cash-Flow should be around 1⁄4 of debt and 1⁄3 of total finance der

In order to approach debt and mezzanine investors financial models are required, that take account of future deviations. As such the financing remains flexible enough with sufficient headroom that the covenants don't hamper future flexibility.